Texas is often at or near the top of states for business climate. The Lone Star State has both the second-largest population and economy after California, and it offers low business costs, no state income tax and strong growth. At the same time, only 83 percent of Texas adults have a high school diploma, according to the Census Bureau, and despite the economy’s increasing diversity, oil price changes have a big effect on the state’s economy. If you’re planning on starting a business in Texas, here’s what you need to know. Consider working with a financial planner as you start a business in the state to help protect your personal finances and interests.
Make a Business Plan
Starting a business in Texas begins with planning. The first choice is which product or service to sell. Entrepreneurs usually decide this based on personal strengths, individual objectives and market realities.
Major industries in Texas include energy, petroleum refining, cotton production, aerospace, manufacturing, biotechnology and information technology. It has the largest state export economy, exceeding the combined total of the next two states, California and New York. Mexico is its largest international trading partner and petroleum products are its largest export.
Creating a marketing plan for a Texas business includes the basic steps for a business plan anywhere. This includes identifying likely customers, finding the best ways to reach them and crafting a marketing message.
As noted, the Texas workforce is less well-educated than most. And the state’s unemployment rate is often lower than the national rate. So planning for ways to attract and retain adequately skilled workers is a priority for a Texas business that will need employees.
Texas startups are financed with founders’ savings, bank loans, venture and angel capital, public offerings, issuing debt and crowdfunding. In addition, state government-supported financial incentives can help address the capital needs of young, growing businesses. These include incubators, non-profit lenders, micro-loans, worker training support and more.
Choose a Business Structure
Choosing and registering an appropriate business structure is central to successful business startup. The Texas secretary of state’s office oversees business entities. Here are the main types:
- Sole proprietorship: This simplest and most common business form consists of a single individual engaged in a business activity without formal organization. There is no state filing requirement for a sole proprietorship. If the business is done under an assumed name, an assumed name certificate should be filed with the local county clerk.
- General partnership: A partnership consists of two or more persons joining together to conduct a business for profit. Like the sole proprietorship, this form has no state filing requirement. Also like sole proprietorships, partnerships may have to file assumed name certificates in the counties where they are located.
- Corporations: Corporations are separate legal entities that provide shareholders with limited liability and ease of ownership transfer but at the cost of more documentation and regulatory filings. There are two types of corporations, C corporations and S corporations. The latter type lets profits pass directly to owner(s), who therefore avoid double taxation. Texas corporations must file a certificate of formation with the secretary of state.
- Limited liability company (LLC): Texas limited liability companies offer liability limit advantages without the complexity and filing requirement of corporations. They must, however, file a certificate of formation with the secretary of state’s office.
- Limited Partnership: A Texas limited partnership is a partnership with one or more general partners and one or more limited partners. A limited partnership must file a certificate of formation with the secretary of state.
- Limited Liability Partnership: This is a kind of partnership that limits the liability of general partners. Registering with the secretary of state is required for limited liability partnerships.
Registering a business entity with the state, when required, can be done online through the SOSdirect portal.
Register the Business Name
Business entities that are required to file with the state will register the business name during filing. To do business under a name other than the owner’s surname or the entity’s exact legal name, they must file an assumed name certificate. This is done by the county clerk in each county in which a business office is or will be maintained. This includes sole proprietorships and partnerships not required to register with the state.
There are 254 counties in Texas, more than any other state. You can find a map giving the addresses of all 254 county clerks’ offices at Texas.gov.
Get Any NeededTax Permits
Texas is one of just seven states without a personal income tax. However, it does have a franchise tax. States sales and other taxes are also collected. To conform to the law, businesses have to get tax ID numbers. And businesses must register with the Internal Revenue Service to pay federal taxes.
To get a federal Employer Identification Number, businesses can apply with the Internal Revenue Service. The EIN let employers withhold taxes on worker wages and salaries and file the business’s federal tax return.
The Texas Comptroller of Public Accounts collects sales taxes and franchise taxes as well as other taxes for the state and local governments. Businesses can apply online for a sales tax permit at the comptroller’s website.
The Texas Workforce Commission collects unemployment taxes. Sole proprietors are not subject to unemployment taxes. Employers can file wage reports, pay taxes and manage their accounts at the commission’s website.
How Texas Taxes Businesses
Texas collects approximately 60 different taxes and fees on various kinds of businesses. Some such as the sales tax apply to many or most businesses. Others are industry-specific, applying only to businesses in one field such as mixed beverages, cement production and oyster sales.
Legal business entities pay the franchise tax. This applies to businesses with at least $1.18 million in annual sales. The tax rate on other retail and wholesale businesses is 0.375%. Other businesses pay 0.75%.
A 6.25% sales and use tax is charged on retail sales, leases and rentals of most goods. Some services are also taxable. Cities, counties, special purpose districts and transit authorities can collect up to 2 percent more. The maximum combined rate is 8.25 percent.
Obtain Any Licenses or Permits
The Texas governor’s office maintains an online business permit portal with information on permits and licenses required to do business in the state. Their business owners can download a guide to permits for businesses from accountants and ostrich farmers to racetrack operators and wineries.
The Bottom Line
The state of Texas continues to grow in the number of businesses that call it home. Texas has low costs, minimal taxation and a relaxed regulatory environment, drawing in startups and businesses big and small. Large, diverse and fast-growing, the state offers a hospitable environment for new businesses.
Resources for Starting a Small Business
- Many financial advisors specialize in helping small business owners with their financial plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Some parts of starting a small business are the same no matter where you plan to operate. Here are some of the basic requirements for beginning a new enterprise.
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